Venture Corporation - UOB Kay Hian 2020-05-11: 1Q20 Below Expectations Due To COVID-19 Disruptions; Downgrade To HOLD


Venture Corporation - 1Q20 Below Expectations Due To COVID-19 Disruptions; Downgrade To HOLD

  • Venture Corp's 1Q20 net profit fell 33.6% y-o-y and formed 19% of our full-year estimate, missing our expectations. The weakness was due to factory lockdowns and supply chain disruptions.
  • Visibility for 2H19 remains unclear as most customers have withdrawn full-year guidance. On the positive side, Venture Corp continues to see healthy demand in certain technology domains and some its products are being used for COVID-19.
  • We reduce our 2020 EPS estimate by 7%. Downgrade to HOLD with a lower target price of S$14.46.
  • Entry price: S$13.20.

Venture Corp's 1Q20 Results

1Q20 net profit weaker than expected.

  • Venture Corp (SGX:V03)’s 1Q20 net profit of S$60.3m (-33.6% y-o-y, -37.4% q-o-q) is below our expectations, accounting for 19% of our full-year forecast. The lower earnings were largely attributed to a 27.5% y-o-y decline in revenue to S$673.0m coupled with a fall in net margin to 9.0% (1Q19: 9.8ppt).

Drop in revenue attributed to supply chain disruption and factory lockdowns.

  • The weaker revenue was due to lockdown measures implemented in several countries to contain the COVID 19 outbreak. Given that the outbreak started escalating between end-Feb 20 to early-Mar 20, factory lockdowns in China, Spain, the US and Malaysia will see the main impact in the second half of 2Q20.
  • Revenue was also impacted by the disruption to global supply chains, namely in China, Malaysia and Singapore.

Most of its operating entities to operate without headcount and working hour constraints by end-April.

  • Venture Corp’s businesses are considered suppliers of both “essential products” as well as “essential services”. As such, it has received exemptions to operate without headcount or working hour constraints for most, if not all, of its businesses by end-April and therefore have resumed operations at the supply side of its businesses.

Healthy demand for certain domains, especially products used in COVID-19 outbreak.

  • Venture Corp continues to see strength in demand in certain technology domains such as life sciences, medical and wellness, semiconductor related equipment, communication and networking modules and products, diagnostic and research equipment, and instruments for test & measurement.
  • Products in strong demand include those that are being used in treating COVID-19, such as ventilators and high throughput qPCR (polymerase chain reaction) and dPCR equipment for testing, monitoring and automating workflow processes, including those used for sample prep, library prep, next-gen sequencing and related supply chains.

Shorter or withdrawn financial guidance from customers limits visibility for 2H20.

  • In 1Q20, most clients reported marginal growth in revenue (0-7%); Illumina recorded a steep 27% y-o-y decline in instruments sales for the quarter. Based on the latest results released by Venture Corp’s clients, most, if not all, have withdrawn their guidance for 2020, citing high level of uncertainly in the current environment.
  • Customers that have withdrawn full-year guidance recently include Broadcom, Philip Morris, Thermo Fisher, Illumina, Fortive and NCR.
  • Customers that have provided some guidance for 2Q20 include:
    • Phillip Morris, which expects a currency-neutral net revenue decline of 8-12% due to COVID-19 impact and also assumes lower sales of IQOS devices; and
    • Illumina, which expects revenue to decline sequentially in every region.

Strong balance sheet and good dividend record.

  • As at end 1Q20, Venture Corp recorded net cash at S$852.5m, forming 19% of its market cap. More importantly, Venture Corp has consistently paid the same level of dividend or better than that in the preceding year.

Downgrade to HOLD

John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | 2020-05-11
SGX Stock Analyst Report HOLD DOWNGRADE BUY 14.46 DOWN 15.500